CEA flags deflation as new challenge for economy

Expresses hope that the growth will be close to 8% in the current FY, notwithstanding lower first quarter GDP number

Chief Economic Advisor Arvind Subramanian has stuck to the official Economic Survey's gross domestic product (GDP) growth forecast for the year of 8-8.5 per cent. This is in spite of the April-June (first three months of the financial year) growth of seven per cent.

"At a time when international prices of oil and commodities have been declining, the quarterly GDP estimates need to be treated with particular care... the (latest) numbers should be treated with utmost caution," he said at a press conference in the finance ministry on Wednesday.

WHAT THE CHIEF ECONOMIC ADVISOR SAYS

• Low oil prices have led to subsidy savings
• Indirect tax numbers encouraging and point to economic pick-up
• Deflationary pressures are a real concern
• If Q1 growth numbers are reassessed, will be closer to 8%
• Stick to economic survey’s full-year GDP growth forecast of 8-8.5%

Subramanian said with international price declines, government revenues had increased and subsidies payments had declined. So, net indirect taxes, which form part of the GDP at market prices, did actually increase substantially. If that factor was counted in the latest quarterly national income estimates, "it is quite likely that the GDP growth numbers will be higher, maybe even substantially higher than what was suggested by the latest numbers".

Adding: "On the GDP forecast, the economic survey said 8-8.5 per cent and certainly if the GDP numbers are reassessed along the line I am suggesting, we will be closer to eight per cent than currently being forecast."

Growth in GDP slowed to seven per cent in the quarter ended June from 7.5 per cent in the previous one, owing to slack domestic and foreign demand. This prevented investment from recording a significant rise, despite a spurt in the government's capital expenditure. The GDP growth in the FY15 June quarter was 6.7 per cent. Global crude oil prices are close to $40 a barrel, much below the budget planners' estimate of $70 a barrel for the year. This is expected to lead to bumper savings on subsidies. Additionally, indirect tax collections have jumped 39 per cent on a year before for the first four months of 2015-16.

However, this increase has primarily been due to the Centre raising duties on petrol and diesel, and the service tax rate. Thus, it does not necessarily indicate a pick-up in economic activity.

Subramanian flagged possible price deflation as a new challenge. "The data seem to suggest that the prices as measured by national income accounts, which is the deflator for both gross value added (GVA) and GDP, have decelerated absolutely and remarkably. It seems to suggest price-wise and in terms of prices measured by the national income accounts, we are closer to deflation territory and far from inflation territory," he said, adding, "Overall, economic growth is moving in the right direction, although its pace is still below what the economy needs but at a pace that is expected to pick up in response to the ongoing reforms. One real challenge that looms ahead appears not to be the price inflation but a possible price deflation."

Although the pace of inflation has been falling, with wholesale price index in a negative zone since November 2014, Subramanian evaded questions on the need for the Reserve Bank to cut rates to spur the economy.